10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
How do I calculate the cost basis of the shares that have split
and are later sold from my employee stock purchase plan?
You need to determine what your basis is in the company stock on the date
of the split. The new shares assume part of your basis in the company stock
on that date. You must divide the adjusted basis in the old stock by the number
of shares of old and new stock. The result is your basis for each share of
stock.
For example, if you owned two shares of company stock with a basis in one
at $30 and the other $45, and the company declares a three for one stock split,
you now have six shares of stock. Three of the shares will have a basis of
$10, and three will have a basis of $15.
Because this is an Employee Stock Option Plan, you may have to report some
or all of the gain on the sale of this stock as ordinary income (wages). For
more information about employee stock option plans, see Publication 525 , Taxable and Nontaxable Income.
References:
Do I report the buying of stock?
Ordinarily, you do not have to report the purchase of stock, only the sale
of stock.
However, if you exercise a nonstatutory stock option, a type of stock option
granted by an employer, you may have income to report in the year of exercise
(the excess of the fair market purchase value of the stock less the exercise
price) if your rights in the stock are substantially vested at the time of
exercise, see Publication 525, Taxable and Nontaxable Income,
for further information.
References:
How do I report an employee stock purchase plan on my tax return?
If your stock option is granted under an employee stock purchase plan,
you do not include any amount in your gross income as a result of the grant
or exercise of your option. When you sell the stock that you purchased by
exercising the option, you may have to report compensation and capital gain
or capital loss. For additional information on tax treatment and holding period
requirements, refer to Publication 525, Taxable and Nontaxable Income.
References:
How do I determine the cost basis of stock bought through an employee
stock purchase plan (ESPP)?
Your starting basis is what you paid to buy the shares (option or exercise
price). This amount is increased by the compensation income amount, if any,
you must declare on your income tax return when the stock is sold. Sales commissions
can also increase the basis in your stock but will not affect the amount of
compensation that must be declared.
Under the employee stock purchase plan rules, if you had an option to purchase
the stock at a discount, the amount of compensation income realized when you
sell the stock depends on whether holding periods are met and whether you
purchased the stock at a discount.
To satisfy the holding period requirements, you must hold the stock for
at least one year after its transfer to you upon purchase and for two years
after the option is granted. If either of these holding periods are not met,
then you have not met the holding period requirements.
If the holding periods are met, the compensation income is the lesser of:
the amount by which the fair market value of the stock at the time you
are granted the option exceeds the option price, or
The amount by which the fair market value of the stock at the time you
sell it exceeds what you paid for it.
If they are not met, the compensation income is the amount by which the
fair market value of the stock, when vested, exceeds what you paid for it.
The compensation income should be included as wages on your Form W-2.
For more information, refer to Publication 525, Taxable and Non-Taxable
Income.
References:
I received an incentive stock option from my company, is this taxable?
If your option is an incentive stock option, you do not include any amount
in your gross income at the time the option is granted, or at the time you
exercise it. However, you may have income for Alternative Minimum Tax in the
year you exercise the option. If the special holding period requirements are
met, income or loss from the sale of the stock is treated as a capital gain
or loss. However, if you do not meet the special holding period requirements,
you may have compensation income. For further information, refer to Publication 525, Taxable and Nontaxable Income
References:
I purchased stock from my employer under an employee stock purchase
plan. Now I have received a From 1099-B from selling it. How do I report this?
If the special holding periods are met, generally treat gain or loss from
the sale of the stock as capital gain or loss. However, you may have compensation
income if:
The option price of the stock was below the stock's fair market value
at the time the option was granted, or
You did not meet the holding period requirement, explained next.
You must hold the stock for more than 2 years from the time the stock option
is granted to you and for more than 1 year from when the stock was transferred
to you. If you meet the holding period requirement and the option price was
below the fair market value of the stock at the time the option was granted,
you report the difference as compensation income (wages) when you sell the
stock. Generally, this compensation income cannot be more than your gain on
the sale. If your gain is more than the amount you report as compensation
income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you
paid for it, your loss is a capital loss, and you do not have any ordinary
income.
For more information, refer to Publication 525, Taxable and Nontaxable
Income, and Publication 551, Basis of Assets.
References:
Where on the tax return do I enter the compensation income I had
from the sale of stock that I purchased under my employer's stock purchase
program?
The compensation income is reported on line 7 (wages, salaries, tips, etc.)
of Form 1040. It is added to the stock's basis used when determining capital
gain or loss on the sale of the stock. Any capital gain or loss on the stock
sale is reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses.
References:
Is the Internal Revenue Code limit of $25,000 per calendar year
for stock bought through an employee stock purchase program (ESPP) based on
the discounted purchase price or the higher stock value?
Under the terms of an employee stock purchase plan, you cannot accrue the
right to purchase more than $25,000 of stock, valued at fair market value
on the day the option is granted, in any one calendar year. The limit is not
based on the purchase price.
References:
- Internal Revenue Code section 423 (b)(8)
Are incentive stock options subject to alternative minimum tax,
and if so, how do I determine the basis for the stock?
A taxpayer generally must include in alternative minimum taxable income
the amount by which the price paid for stock received pursuant to the exercise
of an incentive stock option is exceeded by the stock's fair market value
at the time his rights the stock are freely transferable or are not subject
to a substantial risk of forfeiture.
Increase your alternative minimum tax basis by the amount of the adjustment.
Your basis for regular tax is not affected by the adjustment.
If a taxpayer acquires stock pursuant to the exercise of an incentive stock
option and disposes of the stock in a disqualifying disposition in the same
taxable year, the transaction is subject to regular tax, and the alternative
minimum tax does not apply. Refer to Internal Revenue Code 83, Internal Revenue
Code 56(b)(3), and Internal Revenue Code 422(c)(2). For more information,
refer to
Instructions for Form 6251, Alternative Minimum
Tax- Individuals.
References:
-
Instructions for Form 6251, Alternative
Minimum Tax- Individuals
- Internal Revenue Code 83
- Internal Revenue Code 56(b)(3)
- Internal Revenue Code 422(c)(2)
I purchased stock through an employee stock purchase plan at my
work which split three months later. Three months after that, I sold the stock
at a gain. How does the split affect how I report the stock sale on my tax
return?
With either of the two types of statutory employee stock option plans,
there is no income as a result of the granting of the option or the exercising
of the option (purchasing stock). These two types of plans are the employee
stock purchase plan and the incentive stock option plan. However, if you don't
hold the stock long enough to meet the holding period requirements, when the
stock is sold you may have to report compensation income (wages). The split
will affect the computation of capital gain and compensation income, if any.
For the stock purchased under an employee stock purchase plan to receive
favorable tax treatment, it must be held for at least two years after the
stock is granted and at least one year after the stock is transferred to you.
If the holding periods are not met, the lesser of the fair market value of
the stock on the grant date minus the option price or the fair market value
on the sale date minus the amount you paid for the stock is compensation income
(wages). To the extent that the gain is being taxed as wages on your return,
it becomes part of your adjusted basis in the stock sold. When determining
basis, the amount you paid for the stock is divided equally among the shares
received in the split.
For information on incentive stock option plans and nonstatutory stock
options, or more information on employee stock purchase plans, refer to Publication 525, Taxable and Nontaxable Income
References:
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